NS, FedEx signal slowing economy

   Two bellwethers of the freight transportation sector are showing relative weakness in their volume, signaling that the uneven U.S. economic recovery could be heading for another dip.
   In a preview of its Oct. 23 quarterly earnings report, Norfolk Southern Corp., a Class I railroad operating in 22 eastern states, said it expected diluted earnings per share to be in the range of $1.18 to $1.25 range, compared to a record $1.59 in the third quarter last year and equivalent to the $1.19 per share produced in 2010. Diluted shares represent all the shares that have been sold in the market plus the stock options, warrants and convertible securities that could be exercised by holders, thereby diluting the division of profits among investors.
   The railroad forecast revenues would fall about $120 million in the third quarter due to decreased coal and merchandise shipments, which are offset in part by growth in intermodal volumes. All railroads are suffering this year from steep declines in coal volume as utilities switch to cheaper, cleaner natural gas.
   The company also said fuel surcharge revenues are expected to be about $80 million less than the year-ago quarter. Third quarter 2011 fuel surcharge revenues included a favorable lag-effect of $52 million, while results this year are expected to be impacted by an unfavorable lag-effect in the range of $25 million to 430 million.
   Meanwhile, integrated logistics provider FedEx Corp. on Tuesday reported weak results for its fiscal year first quarter and downgraded its full-year forecast, saying customers are scaling down from premium delivery services to save money.
   “Earnings for the first quarter were below our expectations as weak global economic conditions dampened revenue growth, drove a shift by our customers to our deferred services and outpaced our near-term ability to reduce FedEx Express operating costs to match demand levels,” Chief Financial Officer Alan Graf Jr., said in a statement.
   Reductions in flights and labor hours are among the cost-saving steps being implemented. Officials hinted that more drastic cost-cutting measures will be announced at the company’s investor conference Oct. 9-10 in Memphis, Tenn.
   The Memphis-based transportation company said it expects earnings to be $1.30 to $1.45 per diluted share in the second quarter (vs. $1.57 per diluted share in the same period of fiscal year 2012) and $6.20 to $6.60 per diluted share for fiscal year 2013, compared to the company’s previous full-year forecast of $6.90 to $7.40 per diluted share.
   Overall, FedEx’s performance in the quarter ended Aug. 31 was flat. Revenue increased 3 percent to $10.79 billion. The company’s operating income went up 1 percent to $742 million, while its operating margin dipped a tenth to 6.9 percent and net income declined 1 percent to $459 million. 
   On the bright side, officials said FedEx Ground and FedEx Freight improved their year-over-year operating margins, but that was offset by slowing demand for service at FedEx Express.
   Operating profit at FedEx Express plunged 28 percent to $207 million from $288 million last year and the segment’s operating margin fell to 3.1 percent from 4.4 percent. U.S. domestic daily package volume declined 5 percent. International volumes grew 1 percent – much less than in previous years – but revenue was negatively impacted by 4 percent because of exchange rates and lower fuel surcharges as global oil prices have receded.
   FedEx Ground’s operating income of $445 million represented a 9 percent bump from a year ago and its operating margin grew to 18.1 percent from 17.9 percent on revenue of $2.46 billion. Its daily package volume grew 5 percent driven by increases in both business-to-business and home delivery services. Revenue per package increased 2 percent because of increased rates. FedEx SmartPost, a service in which the U.S. Post Office provides final delivery, saw average daily volume increase 18 percent primarily due to growth in e-commerce, FedEx said.
   The company’s highway freight segment posted operating income of $90 million, up 114 percent from the same period last year. Operating margin doubled to 6.4 percent, on a 5 percent increase in revenue to $1.40 billion. Within the segment, less-than-truckload daily shipment volume increased 4 percent due to increased demand for the company’s economy service. The company attributed profitability to volume growth within a freight-friendly customer base, higher yield and improved operating efficiency.
   Meanwhile FedEx Trade Networks, the freight forwarding and customs brokerage arm, is expected to play an increasing role in FedEx’s services porfolio in tackling freight transport mode shifts. (For more details, read the September American Shipper article, “Integrated forwarding,” page 30.)  – Eric Kulisch